TABLE OF CONTENTS Page Abstract ii Dedication .iii Acknowledgments iv Vita .v List of Figures .viii Chapters: 1. INTRODUCTION Background to Nonpoint Source Pollution Problem .1 Point versus Nonpoint Pollution 2 Purpose of the Study 3 NPS Pollution control programs 4 Current Policies 4 Critics of Current Programs .6 Theoretical Contributions 8 Alternative Proposals for Nonpoint Source Pollution .14 Contribution of This Study 17 Organization of the dissertation .20 2. THEORY AND BASIC MODEL Introduction 22 Definitions 27 Joint Liability Group Contracts .30 Steps in the Contract 36 Designing a contract 37 Bidding Mechanism .38 Forming the group: Hidden Information 39 Action Time: Hidden action problem 42 vii Peer Monitoring .43 Pay-off time .44 Peer Pressure: Time to separate good from bad .44 Asymmetric Information: Moral Hazard Problem .47 Model .49 Assumptions .50 Payment Mechanism 52 Agent’s Decision Problems 55 Principal’s Maximization Problem 63 Constraints .67 Participation Constraint .67 Fixed Payment Effect .69 Incentive Compatibility Constraint 71 Without Peer Monitoring .71 Exogenous Peer Monitoring 74 Finding Optimal Bonus Payment .76 Summary 82 3. GROUP CONTRACT WITH ENDOGENOUS PEER MONITORING Introduction 84 Peer Monitoring .86 Formulation of the Model 89 Payment Mechanism 93 Agent’s Problem 94 Peer Monitoring and Payment Structure 101 Without Peer Monitoring Cost .104 Group size effect and Peer monitoring cost .105 Principal’s Problem: Optimal level of bonus payment 110 Summary 113 4. SUMMARY AND RESULTS Summary 116 Results 118 Future Research Direction .119 5. APPENDIX A 121 6. BIBLIOGRAPHY 124 viii LIST OF FIGURES Figure Page 2.1 Time-line of the relationship between the principal and the agents 34 2.2 Hypothetical Watershed with Nine Farmers 40 2.3 Probability distribution when shirking is very high .60 2.4 Probability distribution when shirking is relatively low 61 2.5 Probability distribution when shirking is very low 62 3.1 Peer monitoring and bonus payment relationship 74
